by Michael Shulman | September 25, 2013 12:08 pm
Traders saw Apple (AAPL) stock move 5% or so on Monday when the company announced they had sold 9 million iPhones and were out of inventory. The news was hardly shocking — according to ChangeWave Research (part of the 451 Group) and other data, the company has been picking up market share for several months.
What was shocking is so many people, supposedly following the company, were shocked. Don’t they visit Apple stores, don’t they talk to Apple customers? I guess not. The stock has been unable to clear $500 and probably will not do so due to the insanity in D.C. and an earnings announcement less a month away. Predicting earnings is a bit problematic due to the slowdown in iPhone sales that happened in September after the new iPhone 5S and 5C were unveiled.
Investors should be happy with Monday’s announcement from AAPL, because the company put a stake in the ground no one is discussing. It is not about the product, the company or the stock — it is about profit margins. Apple said explicitly, the company will continue to focus on profit margins, not market share. And nothing could be more important for the longer term investor.
Market share fights destroyed the profitability of Dell’s (DELL) and Hewlett-Packard’s (HPQ) personal computer businesses; market share fights destroyed Nokia’s (NOK) and Motorola’s (MSI) handset businesses. Not so for Apple – the Mac and its ergonomic cousins, the iPhone and iPad, have generated more profits in the past five years than Dell and HP’s personal computer businesses combined over not just the past decade, but the past two decades.
So, what did I mean by “invest, then trade”?
If you buy Apple, you must turn around and sell calls. Apple has a meaningless dividend — 2.5% or so. You can create a real dividend — real cash, real income, an extra payday — either weekly or monthly by selling calls.
If you buy the shares at $482 today and sell the $490 weekly call, you net $1.70 a share. Do it fifty times a year, and you net $85 a share, a return on capital of almost 18% — plus the 2.5% dividend — plus appreciation in the stock.
Or, sell calls monthly about three weeks before the monthly options expire for $9.70 a share. Do it twelve times a year and that is $116.40 a share, a return of 24% plus that little dividend. Monthlies create more issues — namely, they increase the probability you will need to roll the position forward or get called out if the stock moves up too fast. Either approach yields you a very large payday — every week or every month — and if you are nimble you will also enjoy the appreciation in the underlying stock — a stock I feel is worth at least $800 a share and probably more. That high? Yes — and more on that at a later date.
As of this writing, Michael Shulman held a long position in AAPL, and has sold calls on it.
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